So you want to give your house away to your children...
Closing Thoughts by Jim Young
Sponsored by Andrews & Young, PC
Friday, June 20, 2014
HOME SOURCE www.theday.com/realestate
view pdf here
Should you? This is a simple
question, but the answer usually
Before deciding to give your
house away you should consider
the serious consequences of gifting
a house and the problems that might arise.
You should work with a lawyer who has experience
in this area to see if such a plan makes
sense for you.
When a prospective client calls my firm
and asks about these matters, the question
we get is often, “How much will it cost for a
deed to my children?” We usually speak to
them for a fewminutes and ask them to come
in to our office to discuss the issues involved.
We will want to know why the person wants
to make the gift.
If the only reason for making the gift is to
avoid probate, there are often better ways to
reach that goal. Sometimes the caller may be
experiencing financial difficulties, and has
heard that it is a good idea to give the property
away to protect it from creditors. There
are a number of very bad consequences that
can result from such a plan, and I will not
attempt to outline them here.
Most people who approach us with this
question are looking at the transfer as part
of their estate plan and want to see the house
go to their children sooner rather than later.
Sometimes the person has very limited
income, perhaps due to the death of a spouse,
and they feel they cannot continue to carry
the expense of the house. Sometimes this
concern can be addressed by a reverse mortgage,
but some people are not financially
situated to carry the costs of a home even if
this is done.
Sometimes a child is already living with a
parent, who thinks the child should have the
house as long as they are going to be serving
as a caretaker in their old age. Increasingly,
callers have heard a few things about how
the Medicaid system works, or watched their
parents or friends spend all their assets on
nursing home care, and feel strongly that
they should be able to leave something to
their children after a lifetime of work.
Although gifts of homes to children in
many cases do not give rise to problems,
there are cases where bad things happen. For
example, if a house is gifted to a child without
the parent taking any steps to protect
themselves, the child—or, if the child predeceases
the parent or becomes divorced, then
the daughter- or son-in-law—might decide
they want to liquidate the asset and move to
evict the parent from the house. The parent
may not have good legal grounds upon which
to oppose the eviction.
Risks can also arise if a child encounters
financial problems and a creditor or bankruptcy
trustee seeks to have the home sold
to pay debts. A home gifted to a child who
suffers a divorce may also be at risk. These
cases do happen, though I think they are the
exception. Any parent considering gifting
a home to a child should learn about these
risks, and whether any steps are possible to
One technique that can reduce some of
the risks is for the parent to retain a “life
estate” in the property when giving it away,
although doing so may have some negative
features depending on the circumstances of
the parent and their goals. Anyone holding a
life estate has the right to occupy the property
during their lives, and to rent the property
and receive the net income after paying for
maintenance, taxes, and insurance. Another
technique, though a more complicated and
costly arrangement, is for the parent to
establish a trust to hold title to the property
during their lifetime.
If you give your home away and within five
years apply for Title 19Medicaid benefits, you
will be deemed ineligible for benefits unless
the gift falls within certain permitted transfers.
One option for retaining eligibility is
to have your children give the house back to
you, but keep in mind that they will be under
no legal obligation to do so. Even if they wish
to return the house, they may be unable to do
so.Ahouse cannot be transferred back to you
if your child has died, the house has gone to a
spouse, the house is tied up in a divorce, or a
creditor has placed a lien on the property.
Children receiving the gift of a home
should be aware that they may face penalties
if their parent is deemed ineligible for Medicaid
because of a penalty imposed by the
Department of Social Services due to a gift
made to them within five years of an application
for benefits. The state or the nursing
home may have the legal right to sue the
child for the amounts expended for the care
of the parent.
Gifting a house during life can result in
unanticipated, and often avoidable, capital
gains taxes. That is because children receiving
a lifetime gift from a parent generally
also get the tax basis in the property that
was held by the parent. Tax basis, generally
speaking, is what was paid for the property
plus capital improvements.
So if Dad owns a home that he bought in
1960 and for $15,000, and he gifts it during
his life to his children, they obtain Dad’s
tax basis in the property. When they sell
the property, say for $250,000, the difference
between the basis and sales proceeds
of $235,000 will be exposed to capital gain
taxes of roughly $47,000, assuming a 20 percent
combined federal and state rate.
Now if Dad retained title until his death,
or had gifted it during life but retained a life
estate in the property, the property would
pass through his estate and the children
should get a stepped up tax basis equal to the
date of death value. So if the children sell the
property shortly after Dad’s death, no capital
gain tax should be due.
If you decide to make such a gift after considering
all the factors, you should review
your insurance coverage with your insurance
agent. Find out whether the gift might
violate your mortgage or whether it will have
an adverse impact on any tax reduction programs
the property benefits from, such as
open space or farmland designations. Consider
whether steps need to be taken to preserve
rights under title insurance policies.
In many if not all cases, these issues can be
dealt with in a satisfactory way. But failing
to pay attention to them can have unintended—
that is, painful—consequences.
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Andrews & Young,
Attorneys at Law
567 Vauxhall Street Extension
Waterford Professional Complex
Waterford, Connecticut 06385
112 New London Road
Groton, Connecticut 06340
Evening, weekend and home appointments available.
Andrews & Young, PC, assists clients with Estate Planning, Wills and Trusts, Special Needs and Supplemental Needs Trusts, Trust Administration, Probate and Estate Administration, Conservatorship, Elder Law, Title 19 and Medicaid issues, Planning to address the costs of nursing home care, and Residential real estate, throughout eastern Connecticut, including New London, Waterford, East Lyme, Niantic, Lyme, Old Lyme, Montville, Uncasville, Groton, Ledyard, Gales Ferry, Stonington, North Stonington, Norwich, Old Saybrook and Mystic.